Gasoline continued its remarkable performance with stocks now 2.6 million barrels below last year. This is the most visible evidence that lower prices work to increase demand.
New York, NY (PRWEB) December 22, 2015
NYC-based PIRA Energy Group believes that the Paris agreement will have limited incremental impact on oil demand. In the U.S., the crude import surge drives stock increase. In Japan, crude runs continue to rise and crude stocks moved lower. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
U.S. Crude Import Surge Drives Stock Increase
The stock surplus to last year widened by around 4 million barrels this past week as the highest weekly crude imports of the year pushed crude inventories 4.8 million barrels higher while another week of strong product demand kept product stocks close to flat (+0.2 million barrels). Commercial stocks, which set a new record, are 181 million barrels (or 16%) higher than last year. Gasoline continued its remarkable performance with stocks now 2.6 million barrels below last year. This is the most visible evidence that lower prices work to increase demand.
December Exports Highlight Growing Interconnectivity
Year-on-year net shipments of U.S. gas into Mexico continue to impress. Growth this month has been primarily driven by a notable uptick in shipments on NET Mexico. These stout gains are likely the result of line pack ahead of the imminent commissioning of Los Ramones Phase II North. Furthermore, new gas-fired electric generation (EG) projects and continued growth in pipeline interconnectivity are setting the stage for another record breaking year in 2016.
French-German Day Ahead Prices Diverge In Spite of Flow-Based Market Coupling
Day ahead prices in France and Germany have diverged significantly in the past few months, in spite of the introduction of the FB Market Coupling back in May. Wider spreads on a day ahead basis have been the result of specific fundamental factors, including lower hydro output and stronger French exports, while wind output has been significantly above expectations in Germany. Going forward, we believe that the French-German spreads have the potential to narrow further.
Modest Fall in Coal Prices Despite Weaker Oil Pricing and Strong Dollar
Despite the generally bearish factors emerging this week of falling oil prices and the announcement of a hike in U.S. interest rates, prompt coal prices increased modestly, and deferred pricing was down by less than $1.00/mt week-on-week. Coal market fundamentals remain largely unsupportive of price gains, with short term demand outlooks very weak and limited action on the supply side in response. Signs of a recovery in China’s coal demand are quite limited with China’s electricity generation growing by just 0.1% year-on-year in November (growth rate provided by the National Bureau of Statistics, not using the historical series), and thermal generation (largely coal-fired) falling by 1.5% year-on-year.
U.S. LPG Prices Dropping
U.S. LPG prices plunged, underperforming the broader energy markets as well as international LPG markers – effectively improving the arbitrage economics of U.S. exports to Europe and Asia. Propane prices fell more than 7%, catching down to the precipitous fall in crude oil prices this December. Propane’s ratio to WTI declined from near 46% last week to 43.5% by Friday’s settle. Similarly, butane at Mt. Belvieu shed 6.5% to 52.6¢/gal for January barrels. Natural gasoline, which has remained remarkably strong throughout WTI’s recent weakness, gave up some strength last week, but remains at a premium to the benchmark. C5 prices for January delivery at Mt. Belvieu fell 3% to 91.8¢/gal last week, with increased selling pressure occurring in Friday’s session.
U.S. Ethanol Prices Decline
U.S. ethanol prices fell the week ending December 11, tracking petroleum and corn values lower. Manufacturing margins also declined as product prices decreased more than corn costs.
Currency Markets Negative
While headlines last week focused on the devaluation of the Argentine Peso, other agriculturally related currencies such as the Brazilian Real and Canadian Dollar also had a busy week, with the CAD at its lowest levels since 2009.
More Details On Likely Repeal of U.S. Crude Export Ban
All signs point to an imminent repeal of the U.S. crude export ban, as part of the signing of the omnibus spending bill expected in the U.S. Congress and by President Obama in coming days, perhaps early next week. PIRA believes the end of restrictions on crude exports would take effect immediately upon passage of the legislation. U.S. crude, notably Alaskan shipments, Canadian crude from the U.S., and Mexico stand to benefit. At this point, we estimate the tax benefit for U.S. independent refiners will not be meaningful.
Mercury Air Toxics Rule to Stay in Place
The D.C. Circuit Court decided MATS will remain in place while EPA addresses problems noted in the Supreme Court’s Michigan v. EPA decision. The ruling was influenced by EPA’s quick work in issuing a new proposed supplemental “appropriate and necessary” finding in November, which EPA promised would be completed by April 15, 2016. While the new finding will be challenged in court, this marks the end of near term serious legal challenges that could invalidate EPA’s MATS rule in its entirety. We expect to see more plant to seek additional one year MATS extensions until April 2017, via Administrative Orders based on reliability concerns.
After a Long-Anticipated Initial Rate Hike, the Fed Provides Guidance for Future Policy Moves
The U.S. Fed raised the policy interest rate at this week’s meeting as expected. Now that the initial rate hike is out of the way, the attention has shifted to the issue of how fast the central bank will tighten policy in the coming months. Historical experiences offer little, if any, guidance for the current period; but the latest economic projections from Fed officials indicate that the just-initiated tightening cycle will be unlike any other in the past.
Japanese Crude Runs Continue Rising, Crude Stocks Move Lower
Crude runs rose again as turnarounds wind down further. Crude imports eased sufficiently to draw stocks. Finished product stocks built again due to increases in all the light products other than jet fuel. Gasoline and gasoil demands eased with higher stocks. Kerosene demand eased back and stocks re-entered build mode. Refining margins remain strong, with higher gasoline and naphtha cracks more than offsetting declines in middle distillates.
Standing in Front of the Train
As we move into the second half of December, closing short gas positions will begin to enter the conversation given how far the market has dropped. After all, gas has been on a steady march to lower prices throughout 4Q, when 6 out of every 10 days have been down and the down days have been on average bigger than the up. Will it end now?
Clock Winding Down on New Obama Regulatory Proposals
The clock is winding down on new regulatory proposals that could be finalized by the end the Obama Presidency. Rules put out in later in 2016 could be overturned, depending on November elections. Clean Power Plan regs were finally published in the Federal Register, and the RFS was finally released in November. The Fall Regulatory Agenda offered a look at the Administration's final regulatory priorities. EPA’s new "appropriate and necessary" finding for MATS is expected in the Spring. Heavy-duty Vehicles GHG Emissions Standards (with major long term fuel implications) are expected in summer 2016, along with an aviation GHG endangerment finding - though aviation GHG regs and some key NAAQS regs have been punted into the next Administration.
Production and Stocks Jump
U.S. ethanol production soared December 11, reaching 1.0 MMB/D for only the second time on record. Inventories built by 493 thousand barrels to a six-month high 20.3 million barrels.
Risk of Some U.S. SPR Sales as Early as 4Q16, But Not Likely
In recent months, two key pieces of legislation authorized the future sale of U.S. Strategic Petroleum Reserves (SPR). The bulk of the SPR sales are set for the 2023 to 2025 period. But a provision in the Bipartisan Budget Act for the construction, maintenance, repair, and replacement of SPR facilities allows for sales as early as October 1, 2016. PIRA acknowledges the risk that some U.S. SPR sales may occur in 4Q16 or 1Q17. We understand there is a critical need for $750 million to $1 billion in cavern maintenance, amounting to 15 to 22 MM Bbls of oil hitting the market, or 80 to 120 MB/D over the course of six months, at $45-50/Bbl. But we believe SPR sales in the short term are unlikely. Longer term, SPR sales are slated to occur gradually but much uncertainty remains around the future of the U.S. SPR.
Global Equities Post a Modest Change on the Week
Global equities were modestly changed on the week. In the U.S., all the tracking indices other than utilities gave ground. Energy and materials were the poorest performers. Internationally, the performance was mixed. China and emerging markets posted good gains, while Latin America was the weakest. The Argentina equity market posted a significant loss, with about half being due to a big devaluation in their currency against the dollar.
Long Term Crude Price Marked Down in Advance of SPS Guidebook
PIRA is lowering its long term Brent crude price outlook. The principal drivers for the markdown are on the supply side of the equation. We continue to believe that the current price will prove unsustainable and a substantial price recovery will be required, beginning as early as end-year. The long-term outlook for Brent/WTI spreads should not change significantly as PIRA has long assumed that the restriction on US oil exports would be lifted.
3Q15 Canadian Producer Survey: Quarter-on-Quarter losses and poised for a weak 4Q15
Facing a relentlessly deteriorating price environment since mid-year, Canadian producers focused on cost reduction rather than production in 3Q15. As a result, gas production in Canada sustained the downward momentum that began in 2Q15, defying the traditional seasonal pattern of sequentially rising production following the mud season. The companies in PIRA’s survey group reported a sequential loss, and those outside the PIRA Group experienced a similar net decline. In addition, 3Q15 production suffered a year-on-year loss, the first such drop since mid-2013. Indeed, 3Q15 can be seen as an end to the WCSB gas production uptrend that began in late 2013 and carried into 2015.
Asian Demand Update: Growth Slows, but Still Robust
As a follow-up to our Asian demand assessment for major countries that was issued last month (Third Quarter Asian Demand Looking Robust (November 16, 2015), we now note that year-on-year demand growth has begun to slow. Asian product demand growth is now exhibiting year-on-year growth of 1.1 MMB/D, a decline of almost 0.5 MMB/D from what had been seen, but still considered robust. All of that drop in the growth rate has been in China and had been expected.
Stressors Remain High
Financial stresses remain elevated, and by some measures they have increased further. While the S&P 500 fell only modestly on a weekly average basis, it fell fairly sharply both Thursday and Friday. All of the accompanying indicators also performed poorly including Volatility (VIX), Russell 2000, high yield debt (HYG) and emerging market debt. The cautionary signal and under performance with regard to high yield credit and emerging market debt continues to overhang market sentiment. Commodities remain in a downtrend, particularly energy.
Greater Chance of Repealing U.S. Crude Export Ban, But Would Have Limited Impact on Near-Term Crude Differentials
The impact of a deal to lift the U.S. crude export ban would be limited over the near term as crude price differentials are already very narrow. WTI-Brent will remain within the zero to negative $4/Bbl export parity range. Some Eagle Ford exports (perhaps 200 MB/D or more) might be expected to Europe as this would balance out the reduction in import requirements into Eastern Canada as Line 9 starts up. Longer term, exports would be healthy for the industry, allowing easier grade optimization and putting a floor under crude differentials. It hurts refiners and benefits producers somewhat as crude differentials should be narrower on average, but the effect will be relatively small.
More GWHDD Decimation Intensifies Bearish Sentiment
Last week featured an unprecedented write-down of GWHDDs anticipated through December relative to just last week’s already bearish outlook. Throughout the month, weekly GWHDD tallies have either been the lowest on record, or the second or third lowest — all qualifying statements that do little to turn around bearish sentiment, helping bring the prompt contract to a more than 14-year low and beating down cash prices even more so.
Tea Kettles Affecting China’s Supply/Demand Balance
After granting crude import quotas to independent tea kettle refineries, China is now planning to offer these same refiners product export quotas. The crude import quotas will affect China’s supply/demand balance by adding as much as 200-325 MB/D of incremental clean products production at a time when China’s demand growth is slowing. The product export quotas will lead to China becoming a greater product exporter. While the potential added volumes are still relatively small at the margin these exports have greater significance. There will likely be greater competition for market share in certain parts of the region (e.g., Indonesia, Vietnam).
Gazprom Asked to Respond to EU Allegations of Monopolistic Practices
On Tuesday a special meeting of the European Commission was held with Gazprom, to which the Russian company could verbally respond to the allegations of monopolistic practices in the supply of gas to the Polish and seven other EU states in Central Europe. In April, after four years of investigation, the European Commission officially advised Gazprom, that its practices violate EU antitrust laws.
Tight Oil Operator Review: 2Q15 Results
Despite the weak oil price environment, Eagle Ford was the only one of the "Big Three" U.S. shale plays to see production decline on the quarter. Production continued to rise in the Permian and the Bakken was mostly flat as a drawdown in the inventory of drilled but uncompleted wells offset the impact of reduced drilling. Ongoing deflation in service costs, improved drilling times, high-grading, and enhanced completion techniques allowed operators to increase production using fewer capex dollars. As of the second quarter, full-year spending budgets were down 43% from 2014 levels, but spud-to-total depth (TD) times have come down 10-25% and drilling and completions costs down 15-25%. Operators expect to realize another 5-10% in savings by the end of the year. But most operators expect production to remain flat or decline slightly in 2H15, with some explicitly citing fewer completions.
Paris Agreement to Have Limited Incremental Impact on Oil Demand
The signing of the Paris Agreement last weekend should not result in a markdown of long-term oil demand vs. what we have already assumed in our outlook. The oil used for non-energy purposes, which we expect to be the fastest growing segment over the next two decades, is not burned so it should be relatively immune from CO2 regulations and costs. In the case of transportation, tremendous efficiency improvements and incentives for fuel switching are already incorporated in existing legislation for most of the major markets of the world. Even if a substantial carbon tax were to be imposed, it is not clear that the pace of efficiency improvement or fuel substitution toward electric vehicles would be significantly higher.
Implications of Lifting U.S. Crude Export Ban for U.S. LNG
As a new era in the global gas trade is ushered in next month with a first cargo of flexibly produced and sold US LNG exports from the Gulf of Mexico (the US has without major incident been exporting LNG from Alaska to Japan since 1969 under traditional take or pay long term oil-indexed contract terms with destination clauses included), so too could be a new era for the global oil trade with the potential lifting of the decades-long US crude oil export ban as part of a congressional budget deal. The question is, will the lifting of the ban have any further implications for US LNG exports.
Shale Oil Recoverable Volumes Keep Growing
Shale oil technically recoverable resources keep growing. They have increased from almost nothing 10 years ago to our current estimate of 700 billion barrels of oil (BBO) in the world, with the U.S. being the largest source with 136 BBO. PIRA utilizes the large amount of information acquired in the past 10 years from drilling and producing horizontal oil wells to update shale oil recoverable resources. Even though shale oil still represents a small portion of the world’s total production (6%) and technically recoverable resources (13%), its growth has fundamentally reshaped the long term oil price outlook.
Refinery Values Increasing, But Still Being Acquired at Fraction of Replacement Cost
The refining industry continually witnesses changes in strategic direction as companies leave the business or decide to sell an asset(s) in a particular region. Others see this as an opportunity, especially if the facility can be acquired at a perceived good value and certainly at only a fraction of replacement cost. PIRA has examined a number of the transactions in the U.S. and elsewhere since 2009. On average U.S. transaction values have risen. Acquisition costs have been a fraction of replacement cost, and some more fully priced depending on location and other assets. In Europe, the refinery purchases were largely cracking refineries, with a couple of hydroskimmers as well as lubes and asphalt refiners.
The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
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